Markets look past war for now

• MSCI World Equities were mostly flat despite uncertainty, with Spain and Italy among the best performers in Europe (+0.84% and +0.74% respectively)
• MSCI Korea advanced +1.36%
• Sterling strengthened by +0.9% against the dollar

• MSCI EM equities fell -1.41%, with MSCI China down -2.45%
• Silver (-3.94%), gold (-3.54%) and copper (-3.36%) all fell

(All equity data is MSCI; all data in sterling unless stated)

Financial markets were broadly upbeat last week as investor positivity reasserted itself and looked past the Iran conflict. The S&P 500 Index returned nearly 9% in April, its best monthly performance since November 2020. And last week’s consolidation was driven by a mix of growing optimism and resilient, if not strong, corporate earnings announcements.

With more than half of S&P 500 companies having already reported, investors have mostly welcomed updates. Big ‘hyperscalers’ – including Amazon, Meta, Microsoft and Alphabet – are together expecting to spend more than $725bn this year on AI infrastructure, around 77% more than they guided last year. Indeed, some experts are now starting to claim that the AI economy may become profitable quicker than originally expected.

Although the share price moves of these hyperscalers was mixed, more broadly a significant number of US companies exceeded expectations. This helped drive a rally based on fundamentals and not just hype. As an example, the average share price-to-earnings ratio across US large caps has shrunk by around 10%, suggesting that investors are paying less for forecast earnings.

US reports of slightly higher inflation (to 3.5% to the end of April) and weaker-than-expected GDP growth (2% annualised at the end of Q1 versus +2.3%), caused by tricky geopolitics, didn’t seem to spook investors. 

In Europe, the main equity indices were similarly mostly positive. In the UK, financials benefited from expectations that interest rates might remain elevated for longer, supporting bank margins. The outlook is delicately poised between focusing on the potential returns to be had from corporate activity, and the spectre that the Iran war may develop into a frozen conflict and scar global economic growth.

News that the UAE has left The Organization of the Petroleum Exporting Countries has shifted the cartel into a state of crisis. OPEC’s control of global oil exports will now fall below 30% for the first time since the organisation was established in 1960, making it harder to coordinate supply and demand for its member states –including Iran.

The UAE may be set to expand production beyond OPEC-set limits, perhaps by some one million barrels per day. But OPEC’s loss of its third-largest exporter is unlikely to have an immediate effect on global supply due to disruptions around the Strait of Hormuz.

Brent crude oil prices surged back above $110 last week, partly due to fading expectations of a US-Iran peace deal prolonging the effective closure of the Strait. The volatility in energy prices triggered by the conflict in the Middle East has buoyed some company earnings, including BP, which saw its quarterly profit more than double to $3.2bn – its highest since 2023.

Keen to avoid a policy misstep, central bankers in the US, UK, Europe and Japan kept interest rates on hold last week, sticking with a “wait and see” approach over the Iran war. They are all grappling with the same dilemma: react too slowly to the energy supply shock and risk inflation taking hold; too prematurely, and risk derailing already-fragile growth – especially if inflation proves transitory. This picture is blurred further still by domestic politics.

In what was likely to be Chair Jerome Powell’s last meeting at the US Federal Reserve, policymakers were unusually divided. The 8-4 split vote to hold at 3.5%-3.75% reflected doubts over how to handle persistent inflation, uncertain labour market and growth signals, and the looming leadership transition at the Fed itself. Three of the four dissenters agreed with holding but not the “easing bias” in the Fed’s post-meeting statement. The last time four policymakers dissented was October 1992.

Meanwhile, the Bank of England’s (BoE) Monetary Policy Committee voted 8-1 in favour of holding at 3.75%. Whilst forecasting different potential scenarios, the BoE acknowledged that mitigating geopolitical shocks with monetary policy is limited. Central bank policy alone cannot easily offset higher energy prices, with its effectiveness largely limited to the second order effects on wages and pricing. 

As economic activity will likely weaken if the disruption in the Middle East continues, the bar for rate hikes will remain high. In the UK, the potential for political upheaval after this week’s local and devolved parliament elections has already lifted gilt yields close to 20-year highs over 5%. Caution is the order of the day. Stagflation would not be a welcome outcome.

• Canada launches sovereign wealth fund – Prime Minister Mark Carney has unveiled a new $18bn fund to invest in key national projects, including energy, critical minerals, agriculture and infrastructure – aiming to provide long-term returns for Canadians

• UK house prices defy expectations – UK Nationwide House Prices measure shows prices rose +0.4% month-on-month in April – beating forecasts of a -0.3% decline, with annual growth accelerating to +3%, highlighting continued resilience despite rising mortgage rates and weakening consumer confidence 

• US Q1 gross domestic product (GDP) growth rebounds – The US economy grew at an annualised +2% in Q1 2026, up from +0.5% in Q4 2025 but below expectations of +2.3%. The rebound was driven by the end of the earlier government shutdown, alongside higher government spending and continued investment in AI

• US petrol prices hit four-year high – Average gasoline prices have climbed above $4.3/gal, the highest price since 2022, up more than 30% since the Iran conflict began, with West Coast states seeing the steepest prices

• Eurozone Q1 GDP disappoints – Economic growth in the Eurozone rose just +0.1% in Q1 2026, missing forecasts of a +0.2% expansion, partly due to a sharp contraction in Ireland’s (-2.0% q/q) volatile GDP data

• Eurozone sentiment hits post 2020 low – European Commission data shows economic sentiment fell to 93.5 in April, its lowest since November 2020, with weak consumer confidence partly offsetting more resilience in the industrial and construction sectors 

• Spain’s unemployment ticks higher – Spain’s jobless rate rose to 10.8% in Q1 2026, above expectations, though the total number of unemployed remains lower than a year ago – offering some encouragement 
• Chapel Down tops one million bottles sales – The country’s biggest winemaker sold more than one million bottles of English Sparkling wine for the first time, strengthening its push to capture 1% of the global champagne market by 2035
• China blocks Meta’s $2bn AI deal – Meta Platforms has been prevented from acquiring AI firm Manus, as China tightens restrictions on foreign investment in its domestic tech companies

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.